The Rouse Co. said yesterday that it has reached an agreement to sell six of its Philadelphia-area shopping malls and acquire a large stake in Christiana Mall in Newark, Del., a move that allows the Columbia-based company to shed a mixed bag of properties and gain control of one of the nation's top-producing centers.
The deal with Philadelphia-based Pennsylvania Real Estate Investment Trust is valued at $548 million in cash, debt and securities. "They approached us in the middle of last year," said Robert Minutoli, a Rouse senior vice president who put the deal together. "They were interested in purchasing our centers in Philadelphia. They're a powerhouse there. But we were not so interested in that. Then the idea came up that there could be an exchange. ... For us, this disposition is consistent with our strategy of going for the most productive malls."
In addition to acquiring a 50 percent stake in Christiana, Rouse will get $225 million in cash, which Minutoli said the company will use to pay down debt. PREIT will get six malls and assume $285 million in mortgage debt. It will also hand over $38 million worth of stock to a partnership controlled by its executives that held the stake in Christiana.
PREIT plans to keep the 200 employees now at the Rouse malls, and Rouse expects to keep the 34 workers now at Christiana.
David Fick, a Rouse analyst and managing director at Legg Mason Wood Walker Inc., said the deal is good for both companies.
"Christiana is one of the top-producing malls in the United States, and it fits Rouse's strategy of upgrading their assets," he said. "The properties they're selling fit better into PREIT's portfolio than Rouse's. ... The cash will help them improve their balance sheet."
The deal should not significantly affect Rouse's funds from operations, the key gauge of real estate investment trust performance, the company said.
When the transaction is completed, PREIT will have 28 properties, including 14 malls.
The six malls Rouse is shedding are older properties anchored by such stores as Strawbridge's, Sears and J.C. Penney. They are Cherry Hill Mall, Moorestown Mall, Plymouth Meeting Mall, the Gallery at Market East, Exton Mall and Echelon Mall.
The centers are approximately 90 percent occupied and average $328 a square foot in sales, which is above the national average and would be higher were it not for weak sales at Echelon and Plymouth.
PREIT President and Chief Operating Officer Jonathan B. Weller said his company knows the Philadelphia market well and sees a chance to improve those malls. Sales per square foot now average $360 at PREIT malls, he said.
Christiana, on the other hand, is one of the top producers in the country with sales per square foot of more than $600. At about 1 million square feet, it's Delaware's largest mall and draws many out-of-state consumers to its tax-free shopping at stores including Banana Republic, Williams-Sonoma and Pottery Barn. It should bump Rouse's average sales per square foot from $411 to $427, the company said.
As part of its strategy to go upscale, Rouse recently purchased interests in eight malls owned by Rodamco North America NV. It also built a new high-end mall in Coral Gables, Fla., called the Village of Merrick Park, and expanded its Fashion Show mall in Las Vegas.
"Rouse ended up with an asset they have coveted," Weller said of Christiana. "And we are pleased with the six assets we acquired. We think because we are here and in these assets every day that we can do even better with them."
Two of the properties are to be sold to a separate partnership that is controlled by PREIT executives called New Castle Associates and then transferred to PREIT. For its part, New Castle will gain an ownership stake in PREIT and transfer its interest in Christiana Mall to Rouse.
PREIT plans to pay for the deal with a bridge loan, to be repaid with $420 million from sale of its multifamily portfolio to King of Prussia, Pa.-based Morgan Properties. The multifamily deal is expected to close after the Rouse deal, which is expected by the end of the second quarter.
Both real estate investment trusts are traded on the New York Stock Exchange. PREIT rose 65 cents to $26.40 yesterday; Rouse added 41 cents to $33.23.